Osborne’s horrible hybrid policies

Ordinary fiscal and monetary policy isn't working. So the government has invented some horrible hybrid policies in a desperate attempt to create growth. But the cost is just too high, says Merryn Somerset Webb.

A quiz for you. Fiscal policy can effectively be defined as the redistribution of the nation's wealth from one group to another. Monetary policy can be defined as the manipulation of the money supply. So what is quantitative easing (QE)? Is it a monetary policy or is it a fiscal policy?

It is usually considered to be the former. The Bank of England creates money and uses it to buy assets. In doing so it increases the supply of money. But look a little closer and you will see that it is a fiscal policy too. In keeping rates down and creating a series of asset market bubbles, it is transferring wealth from one group to another. Those who own equities, bonds, or property in the southeast have become much richer. Those who have been forced to buy an annuity, who rely on a fixed income or who once hoped to live on savings interest have become much poorer. So QE is actually both. It's a monetary policy and a fiscal policy (which is a very good reason why we shouldn't do it any more).

But QE isn't the only policy that isn't quite what it seems. Let's look at Help to Buy. Most people don't think of it as being an extension of QE, and technically it isn't. But the effects are likely to be very similar indeed. Regular readers will know that the Bank of England isn't the only organisation we allow to create money out of thin air. The banks do it too every time they give out a new loan they create new money along the way. So Help to Buy (as long as the banks don't replace other lending with Help to Buy lending) will give our money supply a state-mandated boost in exactly the same way as QE has.

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How much? The idea is to "underwrite" some £130bn worth of loans. That's a big number. Our total QE so far has come to £375bn, so this is another third again on top of that. But the fact that it is likely to boost the money supply isn't the only thing that Help to Buy has in common with QE. It too acts as a method of redistribution. The banks do well, the house builders do well and those already on the housing ladder do well, as do those who manage to buy on the scheme and flip before anything goes wrong. But anyone hoping to ever buy a house at an affordable price does badly. And the ordinary taxpayer ends up on the hook for the loses. QE and Help to Buy are in their final effects the same thing.

All this might give you a sneaking admiration for the government. It needs growth to get elected. So in an environment that doesn't allow ordinary fiscal policy or monetary policy to work (you can't increase government spending much and you can't cut rates any further) they've invented a few horrible hybrids. It may be that these hybrids have and will create temporary growth. But as the redistribution continues apace, we increasingly think the cost is just too high.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.